English Central Bank Warns of Housing Bubble - Greenspan Does Not Follow Lead

English Central Bank Warns of Housing Bubble

Greenspan Does Not Follow Lead

For Immediate Release: June 2004

Contact: Dean Baker, 202-332-5218
Mark Weisbrot, 202-746-7264

In a public speech yesterday, Mervyn King, the governor of the Bank of
England, warned that housing prices in England are "well above what most
people would regard as sustainable in the longer term." He later added that
homebuyers should be aware that house prices could move down as well as up. With
these comments, Mr. King sought to challenge the psychology that has pushed the
average house price in England close to $300,000.

Mr. King's honesty could set an example for the actions that Alan Greenspan
could take to contain the housing bubble in the United States before it grows to
even more dangerous levels. While home prices ordinarily increase at
approximately the same pace as the rate of inflation, over the last eight years,
the run-up in housing prices has exceeded the overall rate of inflation by more
than 40 percentage points. This run-up has created more than $3 trillion in
bubble wealth in the housing market; paper wealth that would disappear if home
prices fell back to their normal relationship with other prices (including
rents).

Mr. Greenspan, who for years refused to comment on the growth of the stock
bubble, has actually tried to claim that there is no housing bubble. His
comments on this issue have probably helped to foster the growth of the bubble.
By contrast, if he follows the example of Mervyn King, and publicly lays out the
evidence for a housing bubble, it is likely to limit the damage that the
inevitable correction will cause.